Trading using technical indicators — such as the MACD, for
example, Moving Average Convergence-Divergence — can do one
of two things: help you or hinder you.
Using them as a forecasting method alone can be about as predictable
as flipping a coin. But when you combine them with other forms
of technical analysis (i.e. the Wave Principle), the same MACD
can be your new best friend.
Technical indicators are meant to do exactly what the name implies: “indicate” that
a buy or sell signal may be in place. (Don’t confuse “indicate” with “guarantee”:
They are not called “technical guarantors” for a reason.)
Elliott Wave International’s Futures Junctures editor
Jeffrey Kennedy shows you how he uses technical indicators to
his advantage in his FREE
eBook, The Commodity Trader’s Classroom:
“Rather than using technical
indicators as a means to gauge momentum or pick tops and bottoms,
I use them to identify potential trade setups.”
Jeffrey goes on to describe his favorite indicator, the MACD:
“Out of the hundreds of technical indicators I have
worked with over the years, my favorite study is the MACD [which]
uses two exponential moving averages (12-period and 26-period).
The difference between these two moving averages is the MACD
line. The trigger or Signal line is a 9-period exponential
moving average of the MACD line.”
Figure 10-1 gives you an example of the MACD indicator in Coffee
futures.
One of the signals of a potential trade setup that the MACD
often introduces is what Jeffrey refers to as the Hook.
Here’s another quote from the free eBook:
“A Hook occurs when the MACD line penetrates, or attempts
to penetrate, the Signal line and then reverses at the last
moment. In addition to identifying potential trade setups,
you can also use Hooks as confirmation. Rather than entering
a position on a cross-over between the MACD line and Signal
line, wait for a Hook to occur to provide confirmation that
a trend change has indeed occurred. Doing so increases your
confidence in the signal, because now you have two pieces of
information in agreement.”
Figure 10-4 gives you an example of the Hook at
work in live cattle futures.
“A Hook should really just be a big red flag, saying
that the larger trend may be ready to resume. It’s not
a trading system that I follow blindly. All I’m looking for
is a heads-up that the larger trend is possibly resuming.”
 | Learn more about other technical indicators |
This
article was syndicated by Elliott Wave International and
was originally published under the headline How to Find and “Hook” Potential Trade Setups.
EWI is the world’s largest market forecasting firm. Its staff
of full-time analysts led by Chartered Market Technician
Robert Prechter provides 24-hour-a-day market analysis to
institutional and private investors around the world.
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